By Morgan Housel
Abraham Germansky was a multimillionaire real estate developer in 1920s. He also loved stocks, betting heavily as the market boomed. As the crash of 1929 unfolded, he was wiped out. And that was basically the end of Abraham Germansky. Germansky disappeared on October 24th, 1929.
Later that week another investor in the same city had a very different experience. Jesse Livermore returned home on October 29th to a wife who, seeing news of the day’s record market crash, was prepared to console her husband and return to a life of frugality. Jesse said that wasn’t necessary. He was short the market and made more money in the crash of 1929 than during the rest of his life combined. “You mean we are not ruined?” his wife asked, according to Livermore’s biography. He replied: “No darling, I have just had my best ever trading day – we are fabulously rich and can do whatever we like.” He made, in one day, the equivalent of $3 billion.
Polar opposite stories.
Germansky went broke, Livermore became the richest man in the world. But fast-forward four years and the stories end up nearly identical. Livermore made larger and larger bets, and went on to lose everything in the stock market. Broke and ashamed, he disappeared for two days in 1933. His wife set out to find him. “Jesse L. Livermore, the stock market operator, of 1100 Park Avenue missing and has not been seen since 3pm yesterday,” the New York Times wrote in 1933. He returned, but his path was set. Livermore eventually took his own life.
The timing was different, but Germansky and Livermore shared the realization that getting rich is one thing. Staying rich is quite another.
Everything in the economy is cyclical. Nothing great or terrible is likely to stay that way for long, because the same forces that cause things to be great or terrible also plant the seeds to push them the other way.
Bull markets make stocks expensive, expensive stocks leave little room for error, and little room for error increases the odds of bull markets ending.
Same thing in the other direction.
Recessions cause pessimism.Pessimism causes underproduction, underproduction leads to scarcity, scarcity leads to a new boom.
People and companies, whose behaviors are changed by their own success, are vulnerable to the same cycles.
I’ve noticed a pattern: Getting rich can be the biggest impediment to staying rich. It goes like this.
The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time.
There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia.
The irony is that few things squash humility like getting rich in the first place. It’s why the composition of Dow Jones companies changes so much over time, and why the Forbes list of billionaires has 60% turnover per decade.
Andy Grove, Intel’s founder, put it this way: “Business success contains the seeds of its own destruction.”
Scrappiness and the ability to think differently turns into complacency and the desire to keep things the same.
Harvard Business Review wrote about Grove’s management philosophy in 1996: Grove believes that at least some fear is healthy—especially in organizations that have had a history of success. Fear can be a healthy antidote to the complacency that success often breeds. A touch of paranoia—a suspicion that the world is changing against you—is what Grove prescribes.